It is impossible to say exactly what markets are likely to do in the coming months given the outcome last week. The dollar continues to stay strong. In fact, it has been trending higher. Given the amount of headwinds now facing stocks, and the economy, I think a continued period of selling is in store. We are seeing technical breakdowns in the stock indices, and other risk assets such as crude oil. A trip down to 1,200 on the S&P 500 is a real possibility. We could easily see oil drop another 10 bucks a barrel as demand and sentiment continue to erode. Notice I say "could."
My intention is not to sound like a doom-and-gloom television pundit, but to give a realistic assessment. Let's face it -- the "Bernanke put" has been forgotten. The Fed has thrown a lot of cash at the markets, but it does not have the power to create jobs out of thin air. Only time will tell if the Fed's actions, and the actions of our current administration, are enough to turn this economy around.
And although we see glimpses of improvement here and there, I think everyone would agree that growth has not been up to par, and that, thus far, the Fed's actions have proven to be largely ineffective. Time will tell.
These are issues that would need to be dealt with regardless of who won last Tuesday night. The bottom line is this: I believe we could be in for some serious pain. We are at a place where the markets will fall as a result of lousy economy data, yet still fall if the data show improvement because the thought of the Fed removing the punchbowl is too much for Mr. Market to bear.
Until a lot of the current uncertainty surrounding the fiscal cliff, taxes, the welfare of China's economy and the euro is removed, I feel markets will remain volatile. In addition, we need to see real, consistent improvement in our data set before the Fed can even consider monetary tightening of any kind. We are just not there.
We need to wake up. We are looking at higher taxes, decreased government spending as budget cuts loom and an economy that, after all that has been done, is still in danger of falling back into recession. Want to see what tax increases with budget cuts looks like? Look no further than Greece, or Spain, or Portugal.
I believe that the day of reckoning will have to come at some point. For too long now our economy has been artificially propped up. If things have truly bottomed out, why does the Fed need to continue to pump liquidity into the marketplace? The reason is simple. Because without it, this economy can't stand on its own.
We could be in for a rough ride. But I do see brighter times ahead. I feel that regardless of who won this election, the markets are in trouble and our economy is in trouble. In my opinion, this is a time to be defensive. I would look for lower asset prices with perhaps precious metals being the exception.
Let's face it: Our government needs to get it together. Quit the bickering and get things done. Stop kicking the can down the road. Until we see more bipartisanship cooperation, we are going nowhere ... fast.
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